Today’s update on spending and income for July offers more support for thinking that the latest downshift in economic activity won’t deteriorate into a recession. Personal consumption expenditures (PCE) surged higher in July, rising by 0.8%–the biggest monthly gain in nearly two years and a sharp reversal from June’s slight retreat. If consumption is vulnerable, there’s no sign of it in the latest numbers. Even after adjusting for inflation, PCE was up a strong 0.5%. Disposable personal income (DPI) didn’t fare as well, but still managed a respectable performance by rising 0.3% last month vs. 0.2% in June. Never say never in macroeconomics, but contractions don’t begin with these numbers.
All the challenges that bedevil the U.S. economy remain, of courrse, but the data du jour look surprisingly resilient, given the current climate. In fact, one might wonder if the numbers on the spending side look at little too good. Consider how PCE and DPI compare on a rolling 12-month basis, as the chart below shows. Note that spending (red line) has been accelerating in recent months for year-over-year comparisons. Meanwhile, DPI has remained in a flat/declining trend. The divergence can’t last forever, although the implications aren’t necessarily dire either. At the very least, the gap suggests that consumption’s pace will slow.
Meantime, the key driver of personal income—private-sector wages—perked up last month, rising a strong 0.4% in July, more than double June’s weak advance. Private wage growth also looks robust on an annual basis too, suggesting that the strength in consumption isn’t merely a case of Joe Sixpack going off on another irrational buying binge. As of last month, wages were higher by 4.9% vs. a year ago. As the chart below shows, that’s a strong pace by historical standards. It may not be strong enough to justify last month’s rise in spending, but that’s another issue.
Yes, there are still lots of dangers ahead, but consumer spending and income are foundational components for looking ahead. Until (or if) these metrics show more signs of cracking, the odds still look fairly low that a new recession is near.
But even the strength in today’s income and spending numbers are suspect, says one analyst. “Income and spending grew at a healthy pace in July, but it was before the confidence shock hit in early August, so it doesn’t tell us much about what spending will look like,” says Michelle Meyer, a senior economist at Bank of America Corp.
So it goes these days. Even good news isn’t good news until the next update. But any given outlook is subject to interpretation. “July’s U.S. personal income and spending figures significantly alter the outlook for third-quarter GDP growth,” advises Paul Dales, Senior U.S. Economist at Capital Economics. “Annualized growth may now come in around 2.5%, if not a little bit higher, compared with our previous expectation of around 1.5%.”